In the Long Run, We Are All Dead

President Obama has promised that his healthcare reforms will be budget neutral, that the higher government spending associated with expanding health insurance coverage of the uninsured will be financed by spending cuts elsewhere and by higher revenues, possibly a tax surcharge on high-income individuals.

Of course, the Obama administration is also hoping to introduce healthcare delivery system reforms that will create incentives to provide high-quality, cost-efficient care. Ideas such as creating a “medical home” for Medicare beneficiaries in which primary care physicians would be paid to coordinate care across different settings, bundling payments so that hospitals have an incentive to coordinate post-acute care and reduce the risk of re-admissions, and creating “accountable care organizations,” in which networks of primary care physicians, specialists, and hospitals would be held jointly accountable for the care and costs of Medicare beneficiaries, all have the potential to improve quality and reduce costs. But will they? The viability of applying such reforms across the entire healthcare system has not been tested. Certainly the Congressional Budget Office (CBO) does not have enough evidence—or even details on the specifics of such reforms—upon which to estimate potential budgetary savings.

Over the longer term, after the mechanics of such reforms have been tested and can be implemented across the healthcare system, incentives for providers that reward quality and efficiency may begin to reduce the escalation in healthcare spending. As John Maynard Keynes famously wrote, however, “In the long run we are all dead,” and whether we have the luxury of waiting for healthcare system savings to materialize is an open question. For even if Congress succeeds in tweaking healthcare reform legislation so that it is budget neutral over a 10-year horizon—delaying an expansion in Medicaid, for example, so that the costs do not kick in for 3-4 years, it is fairly certain that it will not be budget neutral beyond a 10-year horizon.

Yet, even before adding these expenditures, the CBO has made it quite clear that the current trajectory of government spending, of which Medicare and Medicaid are the main drivers, is unsustainable. In its Long-Term Budget Outlook released last month, the CBO projected the rise in government debt under a scenario in which Medicare payments to physicians are not cut and the alternative minimum tax is indexed to inflation (a realistic scenario, in other words). Under this scenario, as shown in the graph, federal debt exceeds 100% of GDP in 2023, 140% of GDP in 2030, and 200% of GDP in 2038. Without cutting healthcare spending in Medicare and Medicaid, the only realistic way to avoid this very scary scenario is to raise taxes. Congress continues to tiptoe around this issue because confronting harsh realities risks alienating powerful constituencies, but time is running out.